Educational Articles

Coverage Initiation: Innospec Inc.

Kathryn M. Drew
| March 03, 2014

Value Line has initiated coverage of Innospec Inc. (IOSP) in its flagship product, The Value Line Investment Survey. The company is a chemical producer, which operates through three segments: Fuel Specialties, Performance Chemicals, and Octane Additives. Its products, aimed at improving fuel efficiency, boosting engine performance, and reducing harmful emissions, are primarily sold to oil refineries, personal care and fragrance companies, and various other chemical firms around the globe.

The company began operating as an independent entity on May 22, 1998, following its spinoff from Great Lake Chemical Corporation, now named Chemtura Corporation (CHMT). Innospec is incorporated in Delaware, with principal offices in Englewood, Colorado. It had approximately 1100 employees in 20 countries worldwide as of December 31, 2013. The company’s stock trades on the NASDAQ under the symbol IOSP.

Its Fuel Specialties unit makes a range of specialty chemical products used as additives for gasoline, diesel, oil, and propane. These offerings help energy companies remain in compliance with regulations, while improving fuel efficiency. This segment accounted for 69% of sales in 2013. The Performance Chemicals segment, which made up 23% of the top line last year, provides technology-based solutions that cater primarily to the Personal Care; Polymers; and Fragrance Ingredients markets. Its third group, Octane Additives, produces tetra ethyl lead (TEL), which is used in automotive gasoline. This unit accounted for 8% of 2013 sales. The company conducts a fair amount of its business outside of the United States, with international sales accounting for 65% of the total in 2013.

Innospec’s overall business prospects are fairly solid, as it benefits from any changes to fuel efficiency regulations, environmental requirements, as well as a number of other fuel-mix factors. Demand for its products should accelerate in the years ahead, as vehicle use in emerging markets increases. However, it is worth noting that the company operates in several markets that are highly fragmented, such as the Personal Care sector, which makes for stiff competition in these areas.

In its most recent quarter, the chemical producer logged a top-line gain of 13%, and earnings per share doubled, to $1.06, from the year-earlier period. That said, profits benefited considerably from TEL demand in the December period, which is likely to decline in future quarters, as only three countries still use leaded gasoline. Nevertheless, the company has logged consistent annual top- and bottom-line gains over the past couple of years, and this trend ought to continue.

The stock price has remained relatively stable over the past couple of years, and currently trades at a P/E of 12.3. Based on the likelihood that earnings will expand at a steady clip over the long haul, there seems to be further potential for modest capital gains over the 3- to 5-year pull. What’s more, the company pays an attractive dividend, with a current yield of 2.3%.

In all, interested subscribers are encouraged to follow our full-page reports on Innospec stock, as well as any other supplementary reports published with regard to significant news items relating to the company.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.